Sun, Jan 31, 2016
This is the time to think about instituting estate taxes, and perhaps using them (through exemptions) to encourage socially valuable philanthropy.
Ordinary people have long been fascinated by the lifestyle of the rich and famous, which is routinely reported in the western press. The American magazine Forbes publishes annually a list of the world’s “billionaires,” meaning persons whose private wealth exceeds one billion US dollars or equivalent. The list is drawn largely from publicly available information, so probably excludes some members of royal families and other very private persons, although it is difficult to conceal $1 billion in wealth. The Forbes list contains 1645 names in 2014 (up from 537 in 2001), of whom 959 were from rich countries and 686 were from relatively poor countries, now called emerging markets. The number in China was 152, up from one in 2001 and none in 1970 – although Mao Zedong with his private train and numerous guest houses arguably had the perquisites of a billionaire, without personally owning the assets.
Less well covered than lifestyle is the source of the wealth, much less an analysis of the possible economic consequences of the accumulation of such concentrations of wealth. This deficiency has now been rectified by Caroline Freund of the Peterson Institute of International Economics in Washington. She distinguishes between billionaires in advanced countries and in emerging markets, and for each group asks how many billionaires received their wealth, and how much, through inheritance, and how many were “self-made” billionaires. Among the self-made billionaires, how many made their wealth (and how much) in the financial sector (including property investments), in the resource sector, through privatization of state-owned assets, and through founding or managing new non-financial firms. She focuses especially on the last group, on the grounds that wealth accumulated through the other channels were more likely to involve important government connections, either through regulators or through allocations of government property (including land). While there were doubtless some entrepreneurs, excellent managers, and even innovators among these “self-made” billionaires, there is at least some suspicion that they acquired their wealth primarily through their connections to decision-making government officials. Founders of non-financial, non-resource firms are less suspect in this regard.
Sub-Saharan Africa had 16 billionaires in 2014 (up from two in 2001) on the Forbes list, half of them in South Africa (and all of the inherited wealth). Of the 16, 13 were self-made, of which in turn 7 were founders or executives of non-financial, non-resource firms.
Rapid growth in the number and the wealth of the very wealthy in emerging markets suggests the strong need, soon, to reflect on how these societies want to shape the distribution of future wealth. In particular, do they want to end up like Latin America or Western Europe, where over half the wealth is perpetuated through inheritance, or do they want to encourage self-made wealth? Now is the time to think about instituting estate taxes, and perhaps using them (through exemptions) to encourage socially valuable philanthropy.
Image Credit: Africa Ranking
Professor of International Economics at Harvard University.
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